OREANDA-NEWS. June 29, 2012. The KfW Investment Barometer indicates that business investment in Germany fell by 0.2% in the first quarter of 2012 on the previous quarter. This is surprising because the economy grew by a strong 0.5% in the same period. The recession in many areas of the eurozone and the deteriorating performance of the world economy appear to have a deeper than expected impact on capital expenditure in Germany. Business investment is likely to grow only moderately over the rest of the year as well. KfW expects a slim plus of 1.6% for all of 2012. Last year investment by companies was still up by 7.6%.

"Declining export performance and the uncertainty caused by the euro crisis are dampening the investment propensity of German businesses more strongly than expected. Nevertheless, I am not concerned that there will be a contraction. Business investment will increase in 2012 as well, if to a much lesser extent than the year before", said Dr Norbert Irsch, Chief Economist of KfW Bankengruppe, commenting on the current KfW Investment Barometer. "Attractive interest rates, easy access to credit and solid domestic demand are still factors that stabilise business investment."

In the first quarter of 2012, investments in assets like machinery, equipment and vehicles declined above all (-1.0%). Other expenditure (such as on patent rights or software) fell considerably by 1.4%. The only rise was in investments in industrial buildings, which benefited particularly from the low interest rates and increased by 2.1%, preventing an even greater decline in companies' overall investment between January and March. Business investment activity is likely to have been only moderate in the second quarter of 2012 as well, as suggested by early indicators (mechanical engineering output, capital goods orders).

For 2013, KfW forecasts only a moderate revival of business investment, which it expects to grow by 3.8%. "The further development of investment activity depends, however, on how the euro crisis plays out", Irsch warned. "Our current forecast assumes that the eurozone will stabilise. But if the recent contagion of Spain cannot be contained and other problem countries get drawn into the downward spiral, business investment can be expected to drop sharply. Bank lending would then suffer from considerably more difficult funding conditions. The uncertainty for businesses would also massively increase and their propensity to invest would be dramatically reduced."